ART ATTACK!

The world art market is now crunched too - another financial safe haven bites dust, or as I explained in a conference call earlier to my Paris dealers, "La question de la contagion de la crise financière au marché de l’art est désormais centrale." The signs began in September, though eminently predictable. Some observers claimed the art market had not contracted since 1990, which is nonsense. It declined in the mid-'90s after the 92-93 crash, which hit all luxuries, and again after 2001-03 when a lot of wealthy IT options earners suddenly got hit for capital gains as their share options crashed 90%. Although art values survived 9/11 (when several great collections and collectors were lost in the twin towers and a warehouse fire in East London destroyed a vast collection of Brit Art), the current meltdown of the global financial system has been too much for the "social climbers' investment" market. From January levels, the average prices of auction house art by October was 14.5% down, and that's without a short-selling market. In art all investors go long on illiquid assets and hope that windows of opportunity will suddenly open to sell at a euphoric profit. With hindsight, the market's peak was a year ago. Damian Hirst and Jeff Koons did well, however, before prices deflated. All market segments, all artists - from classic investment grade to top-end speculative to entry-level affordable (<$10,000) - are dragged down by depreciation of "speculative" works, what we financial analysts call high risk high return "Junk". Prices are down in small provincial auction rooms as at major prestigious houses. The value wiped out is undoubtedly in the region of $tens of billions. Demand as ever was driven by the nouveau riche, recently from among the arrivistes of Asia, Russia and the Middle-East that kept prices buoyant until June and allowed savvy Western collectors to offload. Mrs Richard Fuld was a little late into the market but others like Charles Saatchi and Richard Grant among collectors did well. The bought-in rate (buyers failing to come up with the final bid price) has more than doubled in one year, growing from 25% by value at the end of 2007 to 54% in October 2008. Paradoxically, the prices of works presented above the $100,000 line successfully sold remained stable. This is a time to market problem, the period of weeks or months between when works are valued to being published in catalogues to being competed for and orchestrated at the auction sale, so that price adjustments are slow to reflect the actual market. As reserve price estimates are behind market reality, the first supply/demand disequilibria causes a jump in the bought-in rate. I sold parts of my collection recently and had them converted into my own version of Carl Andre's bricks or Damian's skull. Whereas the top-end of the market (4.1% of deals) has shown relative and temporary price inertia, on the more volatile cheaper market segments (less than $100,000) falls have been frictionless and act as lead indicators, falling 18% year to date! We can expect at least the same again in 2009. But, long before prices fall further market illiquidity cuts off further sales other than fire-sales and insurance claims. The impact of the crisis has shaken boardrooms and drawing rooms around the world. The global market is efficient as prices contracted in New York, Paris, Berlin, Rome and London just as it did simultaneously in new growth zones of Hong Kong, Singapore, Shanghai, Tokyo, Sao Paolo, Bombay and Dubai. The very latest results recorded in these new markets are extremely disquieting to those who bought heavily into Chinese art this year on the back of the Olympics euphoria or the new nascent Gulf buying e.g. the $16.9m by Christie’s Mid-East in its October sales in Dubai compared with the $32-43m expected. In Hong-Kong in October '07, Sotheby’s posted a bought-in rate below 10%. A year later, at the same sales, the ratio was 29%. For long term proven fundamentals, if buying contemporary art on Walter Buffet principles, though I doubt he ever bought any investment grade art, I recommend the works of Joseph Beuys (1923-1986), something he'd explain on the blackboard and then have a good laugh at. He still appears in more art shows a year (360+) than Andy Warhol (350+), despite dying 2 years earlier, and the capitalisation value of his entire oeuvre has retained its museum price value of somewhere in the $6billions region. At the beginning of this year, many warned including myself that the art market would see contraction in 2008, notably as ArtPrice put it uniquely "via a recrudescence of buyer vigilance (that) could well start to manifest at auctions". 2009 looks set to be a year of steeper price contraction throughout the entire market. Buying at distress prices is a must for serious collectors. Any investors reading this may wish to join my Art Vulture Fund offering 10 year returns of 200-500%. During the contraction of 1990-92, prices fell 44% in 2 years. This time round I'm expecting 60-80% falls depending on the segment given that in the USA prices rose 67% in 2005-08 and globally (partly currency exchange rate movements) by 48.9% measured in Euros. Part of this year's fall is the strengtening dollar given that most of the worlds' serious collectors live in the USA. Hence high investment grade art can act as a currency risk hedge. Art outpaced equities, though underperformed property. But like any equity market individual gains can greatly exceed the market average or greatly undershoot it. Equity and fixed income markets tend to react immediately to announcements by the Fed, BoE or the ECB in seconds. The art market functions with a different rhythm but is at least as vulnerable to insider trading and system gaming. But more like the real estate market, the art market has a natural "interval" between cause and effect with transactions often taking several months to conclude.
This time round, however, the art market barometer dropped 13% at the start of October in unison with the sharp falls on stock markets. Such prices falls will not effect tight markets for great dead artists where the work is in short supply and hard to transport and the artists are widely popular such as Jean Tinguely who turn junk into fine art as opposed to those of a more semantic games-playing approach to art who churn out junk merely for investment. Below is Jean Tinguely's Homage to New York. This may be related to a change in the future evolution of art prices following several exchanges opening to trade art options and futures. Personally, I'm keen to develop an artist limited edition signed bearer bond certificates market price gurantee system whereby artworks can be effectively securitized and have their spreads insured. Whereas over the summer when I found less than a quarter of artists and agnts, gallerists and collectors would openly anticipate a contraction in the fourth quarter, in October at London's Frieze the proportion of bearish embracers of this idea rose to well over half.